If the spot exchange rate is undervalued, the foreign rate of return is:
A) equal to the domestic rate of return.
B) greater than the domestic rate of return.
C) less than the domestic rate of return.
D) diverging from the domestic rate of return.

Question

Quizplus · Accepted Answer

If the spot exchange rate is undervalued, it means that the foreign currency is worth less than what it should be based on the current exchange rate. As a result, investing in the foreign country would generate higher returns when converted back to the domestic currency. Therefore, the foreign rate of return would be greater than the domestic rate of return.

If the Spot Exchange Rate Is Undervalued, the Foreign Rate